Whether you're starting out or scaling up, there are many things that may not go as planned. For example:
- Nobody buys your product or service
- Critical input costs exceed your budget
- Collections take longer than expected
- You don't raise essential funding
Many entrepreneurs deal with these risks on a first-come first-served basis. The problem with this approach is that you can easily end up investing a lot of time and effort, only to encounter something catastrophic near the end that ruins everything.
It's far smarter to validate each risk in advance so that you know whether it's a real concern or not. If it is, you can prepare accordingly and avoid being blindsided, or pivot into a different opportunity altogether.
So where should you begin?
First, list everything that could possibly go wrong. Get feedback from people who aren't as emotionally invested as you are because they'll poke holes that you would have never considered. Then rate the impact and probability of each risk on a scale of 1 - 10 as follows:
Impact: 1 = minor inconvenience; 10 = total and irreversible failure.
Probability: 1 = highly unlikely; 10 = guaranteed to occur.
Multiply these ratings to calculate an overall score for each risk. Those with higher scores are obviously more important because they're either more likely to occur, will have a greater impact, or both.
You might think that the logical course of action is to prioritise risks with the highest scores, but that would be a mistake because some will cost more to validate than others. It may be more economical to prioritise risks that can be resolved quickly than those that take longer, even if the latter have a higher overall risk score.
Therefore, you need to rate the validation cost for each risk on a scale of 1 - 10 as well: 1 = very quick and easy to validate; 10 = requires substantial time / talent / money.
Now you can calculate the validation efficiency for each risk accordingly: impact * probability ÷ cost.
This tells you how much risk you can validate for each investment unit. By prioritising risks with the highest efficiency, you can resolve more of them early into your journey and grow more quickly instead of incurring sunk costs while fumbling in the dark.